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New Jersey On The Eve Of Enacting Anti-STOLI Legislation That May Have Little Practical Impact 

After several false starts, New Jersey is on the verge of passing legislation aimed at prohibiting stranger-originated life insurance (STOLI) that while broad in scope, may have little practical impact.

The bill, A1263 (the Anti-STOLI Bill), passed both houses of the New Jersey Legislature in August and could be signed into law by Gov. Murphy any day. When the New Jersey Anti-STOLI Bill becomes law it will not only permit life insurance carriers in New Jersey to challenge the validity of suspected STOLI policies at any time, but could make parties such as servicers, securities intermediaries, and investors of life settlement far more likely to be sued in New Jersey in a lawsuit claiming the policy they were involved with is STOLI. However, since most of the conduct that the Anti-STOLI Bill aims to punish has long since ended, the Anti-STOLI Bill’s impact may likely end up being more theoretical than practical.

The Anti-STOLI Bill has a number of key provisions. First, the Anti-STOLI Bill defines STOLI as “an act, practice or arrangement to initiate or procure the issuance of a policy in [New Jersey] for the benefit of a third-party investor who, at the time of policy inception has no insurable interest under the laws of this State in the life of the insured.” The Anti-STOLI Bill provides that STOLI activity can include cases in which a policy is purchased with resources from a person or entity that lacks an insurable interest in the insured’s life, or pursuant to an agreement or arrangement to transfer ownership of the policy to a third-party. The definition of “STOLI” in the Anti-STOLI Bill is potentially broader than the definition of insurable interest under current New Jersey law.

The following are the Anti-STOLI Bill’s most stringent provisions:

  • Under the Anti-STOLI Bill, an insurer may contest the validity of a New Jersey policy, regardless of whether the policy’s contestability has expired, on the grounds that the policy was a STOLI transaction.
  • The Anti-STOLI Bill also provides that any person damaged by the acts of a person in violation of the Anti-STOLI Bill may bring a civil action against the person who allegedly committed the violation.
  • With respect to what is considered to be a violation, the Anti-STOLI Bill states that no person shall directly or indirectly engage in any act, practice, or arrangement that constitutes STOLI.

The foregoing provisions provide expansive statutory rights to parties who have an incentive to attack alleged STOLI activity. Under the Anti-STOLI Bill, life insurers will have the unfettered ability to challenge policies that they suspect of being STOLI, no longer having to worry about whether such a challenge could be barred by the policy’s contestability period. The Anti-STOLI Bill would codify recent case law in this regard. Furthermore, because the definition of “STOLI” under the Anti-STOLI Bill is arguably broader than the definition of “insurable interest” under existing New Jersey law, a claim under the Anti-STOLI Bill, once codified, would not necessarily require allegations or a showing of lack of insurable interest. Accordingly, the New Jersey Anti-STOLI Bill would, if enacted, arguably afford greater rights to insurance carriers than New Jersey common law presently does with respect to insurable interest requirements. New Jersey common law currently only permits an insurance carrier to contest the validity of a life insurance policy for lack of insurable interest after expiration of the policy’s contestability period. See Sun Life Assurance Co. of Canada v. Wells Fargo Bank, N.A., 208 A.3d 839 (N.J. 2019). Under current New Jersey law, a stranger can procure or cause to be procured any insurance contract upon the life, health or bodily safety of another individual if (and only if) the benefits under that contract are payable to the individual insured or his personal representative, or to a person having, at the time when that contract was made, an insurable interest in the individual insured. N.J.S.A. § 17B:24-1.1(b). The Anti-STOLI Bill would arguably prohibit such life insurance purchases, which are currently legal under New Jersey’s insurable interest statute.

The Anti-STOLI Bill, if enacted, would also provide similarly expansive rights to parties other than life insurance carriers. Currently, the only private party other than an insurer that can challenge a policy for lack of insurable interest in New Jersey is a deceased insured’s estate. See N.J. Stat. Ann. § 17B:24-1.1. The Anti-STOLI Bill, if enacted, would expand that right to any person who has been damaged by acts that violate the Anti-STOLI Bill. The bar for what constitutes a violation appears to be fairly low, as any person who directly or indirectly engaged in an act constituting STOLI will be deemed to have engaged in a violation pursuant to the statute. Thus, it is very plausible that the Anti-STOLI Bill would permit the family of a deceased insured, regardless of whether they were involved with the insured’s estate, to sue to for the death benefit of a policy issued on the insured’s life that is alleged to be STOLI, and name in that suit every party who was ever involved in that policy, including servicers, securities intermediaries, and investors who bought and sold the policy or an interest therein in the secondary or tertiary markets. Even though those parties may have no knowledge of, or connection to, the conduct that allegedly caused the policy to be STOLI when it was issued, they nonetheless could be accused of indirectly engaging in STOLI activity by continuing to keep the policy in force.

Aside from the provisions mentioned, the Anti-STOLI Bill provides that any contract, arrangement, agreement, or transaction entered into in furtherance or aid of a STOLI policy or practice will be void from the outset. This provision would effectively void any life settlement transaction that is deemed to be STOLI. The Anti-STOLI Bill also clarifies that a trust that is created to give the appearance of insurable interest, or used to initiate or procure policies for investors, shall be a violation of New Jersey’s insurable interest laws. Finally, the Anti-STOLI Bill provides the New Jersey Commissioner of Banking & Insurance with the ability to take actions to enforce its provisions.

Despite the Anti-STOLI Bill’s seemingly far-reaching provisions, there are a number of reasons to believe that the Anti-STOLI Bill will have little impact from a practical perspective. First, there is nothing on the face of Anti-STOLI Bill to suggest that it will apply retroactively, i.e., to STOLI activity that occurred prior to enactment of the Anti-STOLI Bill. The Anti-STOLI Bill does not expressly state that it should apply retroactively, nor is there anything in the legislative history to suggest that the legislature intended for the Anti-STOLI Bill to apply retroactively. See James v. New Jersey Manufactures Ins. Co., 83 A.3d 70, 77 (N.J. 2014). This is significant because much of the activity that the Anti-STOLI Bill looks to punish has long since ended. Thus, unless a New Jersey Court determines that the Anti-STOLI Bill can apply retroactively to activity that happened in the past, but has since ended, we do not believe that the Anti-STOLI Bill would result in a significant increase in STOLI-related litigation in New Jersey, other than perhaps a few lawsuits brought by carriers seeking to get a ruling on the retroactive application of the Anti-STOLI Bill.

Second, the Anti-STOLI Bill excludes from the definition of “STOLI” lawful life settlement contracts (statutorily defined as viatical settlements in New Jersey) that were entered into in accordance with New Jersey’s Viatical Settlement Act, N.J. Stat. Ann. § 17B:30B-1, et seq. Again, the practice of entering into life settlements that did not comply with New Jersey’s Viatical Settlement Act is something that largely ended some time ago.

Thus, it appears that the Anti-STOLI Bill is too late.

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